© Copyright 2017 2017-33568 Exp. 1/2019 P a g e | 1
February 2017
Whatever you’re doing right now to earn a living, there’s a good
chance much of your work could eventually be done by a machine. In
fact, some futurists predict machines will do all our work. On first
exposure, this may seem ridiculous. But both history and current
developments make a reasonable, perhaps compelling, argument that
work will be a much smaller part of our future. If this is true, it portends
some dramatic changes for personal finance as well.
In economic terms, people are born with an “endowment of human
capital;” they have the potential to work, to learn, and to earn money.
Human capital is often referred to as “labor,” which distinguishes it from
other capital assets, such as land, equipment, or money.
Wealth creation occurs when human labor is applied to capital – to
grow food, manufacture products or provide services. Labor is the
catalyst for all wealth, because capital can’t develop on its own. Forests
don’t become houses, and ore doesn’t become metal apart from labor.
Over time, labor tends to get smarter, more sophisticated in its use of
capital. And in doing so, much human labor becomes less essential; once profitable ways of earning a living disappear, the man is replaced
by a machine.
The logical conclusion of this trend of capital replacing labor is that, eventually, the need
for labor will almost cease to exist. In academic circles, this is called “capital-biased
technological change.” In the past, this displacement of labor by capital has swept through
specific sectors, completely changing the economic landscape.
One of the ways economists analyze an economy is by the distribution of the labor force
– who works where. Historically, labor has been divided into three categories: those
In This Issue…
CAPITAL MANAGEMENT:
YOUR ECONOMIC EDGE
OVER AUTOMATION Page 1
LIFE INSURANCE: STILL
GOOD FOR ESTATE PLANNING
Page 3
THE BEST RETURN-
BOOSTING STRATEGY
Page 4
LET’S START WITH
A VACATION!
Page 5
* The title of this newsletter should in no way be construed
that the strategies/information in these articles are guaranteed
to be successful. The reader should discuss any financial
strategies presented in this newsletter with a licensed
financial professional.
Capital Management: Your
Economic Edge
over Automation
© Copyright 2017 2017-33568 Exp. 1/2019 P a g e | 2
working in Agriculture, Industry and Services. This chart, derived
from academic research and government statistics, shows the
changes in the US labor force from 1840 to 2010.
The Agricultural and Industrial segments of the labor force are
easily defined: these are people whose work produces food or
manufactures goods. The Service sector encompasses a much
broader range of labor: retail, transportation, management,
education, medicine, finance, information technology, etc.
In less than two centuries, the labor force distribution has
flipped dramatically, due almost entirely to capital replacing
labor.
In 1900, most Americans still lived in rural areas and 40
percent of them worked on a farm. Today, only two percent of
Americans list farming as an occupation, yet these few
mechanized farmers produce much more food than their
predecessors.
A similar pattern is occurring in Industry. In the early 1950s,
manufacturing represented almost 40 percent of the nation’s
workforce. But since then, automation has steadily eroded this
sector of labor. Citing a January 2016 Federal
Reserve report, Rex Nutting wrote in a March
28, 2016, MarketWatch column that “US
factories produce twice as much stuff as they
did in 1984, but with one-third fewer
workers.” Today, Industry comprises under
20 percent of the US work force. But like
Agriculture, it is plausible that eventually
only two percent of the work force will be
needed by Industry, as machines can handle
the entire process, from design to manufacture.
Historically, as both agricultural and industrial labor
opportunities diminished, the service sector has taken up the
slack. And until now, the service industry has been the most
machine-resistant. But machines are beginning to replace low-
end service labor (think of the automated phone systems that
keep you from talking to a real person). And as they integrate
with artificial intelligence platforms, automation is moving up
the service food chain. In a November 2016 interview in Vox,
Andy Stern, a past president of one of the nation’s largest
unions, notes the most common job in 29 states is driving a
truck. Yet driverless vehicles (projected to hit the road within
the next five years) could make that occupation obsolete,
perhaps overnight.
While many see capital-biased technological change as
inevitable, there is no consensus on whether the economic
consequences will be beneficial or disruptive. An August 8, 2014,
Wired article by Marcus Wohlsen captures the ambivalence:
“Optimists say that more robots will lead to greater
productivity and economic growth, while pessimists complain
that huge swaths of the labor force will see their employment
options automated out of existence.
“Each has a point, but there’s another way to look at this
seemingly inevitable trend. What if both are right? As robots start
doing more and more of the work humans used to do, and doing
it so much more efficiently than we ever did, what if the need for
jobs disappears altogether? What if the robots end up producing
more than enough of everything that everyone needs?”
Hypothetically, an economy without human labor at the center
threatens to unravel the social and financial systems under which
we operate, which is sort of scary and unnerving. If almost no one
earns a living, what happens to buying and selling, lending and
borrowing, income taxes, retirement planning?
One response put forward by some economists to the possible
end of work is a Universal Basic Income (UBI), where each adult
citizen receives a monthly stipend, with no regard for employment
status or income. Stern, the ex-union president, sees UBI as a way
to ease the transition away from dependence on wages by
providing an economic base that gives people a sense of security,
as well as the freedom to be entrepreneurial. A large-scale
experiment involving UBI for 2,000 people in Finland began in
January, and two cities in Scotland are also considering UBI on a
test basis. Last year, a Swiss referendum proposed giving every
adult citizen a guaranteed income of $2,500 a month, but the plan
was soundly defeated; centuries of working for
a living make people resistant to the idea of
giving money to everyone for doing nothing.
Some more pragmatic thinkers simply want
to get more capital in the hands of workers.
Noah Smith, in a January 2013 Atlantic article
titled “The End of Labor: How to Protect
Workers from the Rise of Robots,” says it
should be “easier for the common people to
own their own capital – their own private army of robots. That
will mean making ‘small business owner’ a much more common
occupation than it is today.”
Taking the idea one step further, Smith proposes giving every
citizen “an endowment of capital” when they turn 18, consisting
of a diversified portfolio of investments. “This portfolio of capital
ownership would act as an insurance policy for each human
worker; if technological improvements reduced the value of that
person's labor, he or she would reap compensating benefits
through increased dividends and capital gains.”
You might dismiss the end of work as dystopian pessimism.
You could discount the replacement of agricultural and industrial
labor, ignore the academic papers, and scoff at experiments with
universal income. But recall the phrase repeatedly used to
describe the aftermath of the Great Recession: The Jobless
Recovery. Productivity is up, but wages and employment are not.
Capital is replacing labor.
It is reasonable to assume this change will not impact all
sectors equally; some careers and professions may endure and
even benefit from this displacement. And there will still be
farmers and industrial workers (just not as many) and it might be
possible for these select few to successfully continue in a work-
and-save personal finance model.
But if your anticipated retirement is more than 10 years in the
future, relying exclusively on your labor for present income and
future retirement is a financial strategy with potentially seismic
fault lines. A labor displacement in your field could precipitate a
financial earthquake.
These conditions present two profound and inter-connected
philosophical shifts in personal finances. First, the potential
wealth accumulation from work alone (and saving) will be much
lower. Second, when capital replaces labor, the only “job” left for
Labor is the catalyst for all wealth,
because capital
can’t develop on its own.
If a robot
does your
job, what will
you do?
© Copyright 2017 2017-33568 Exp. 1/2019 P a g e | 3
human labor is managing/owning capital. In this paradigm, capital
management – i.e., the active control of assets for both short- and
long-term income – is an essential wealth-building activity.
In most careers, there is little integration between labor and
capital; people are either workers (labor) or owners (capital).
Workers are focused on compensation; their only “capital
management” usually consists of designating a money manager at
retirement. Many, if not most, workers are ill-equipped to be
owners.
But when capital-biased technological change and universal
incomes threaten to cap or drastically limit earnings from one’s
labor, the only practical response is to consider capital
management – and not only for retirement, but perhaps to
supplement or replace current income. If automation takes your
job, owning and managing a fleet of driverless cars could be a
lucrative and necessary application of your endowed human
capital. And monthly income from rental properties might be a
steady retirement income.
The value of your labor may not be immediately threatened.
But your financial life isn’t just about today; most of your
financial objectives won’t be realized until a future date. What
happens if capital-biased technological change has re-ordered the
economics of daily life?
No matter where your human capital is currently working,
considering capital management strategies for your personal
finances is good advice, because even if it’s wrong, it’s right. You
can’t make a mistake by becoming a better capital manager.
“The American estate tax turned 100 this year. It
probably won’t live to see 101.”
That’s the lead sentence in a December 9, 2016, Wall Street
Journal article commenting on the likelihood the incoming
administration will introduce legislation to repeal the estate tax.
But while it’s a nifty turn of the phrase, and might be an
interesting topic for debate (“Should the government tax someone
again after they’re dead?”), the estate tax is really a non-issue for
most American households.
The Tax Policy Center estimates that only 0.2% of Americans
who die in 2017 will leave an estate large enough to incur federal
estate taxes. That’s roughly 5,200 people, a number so small that
the impact of the current estate tax on government revenues and
social inequality is already miniscule.
However, depending on what might be repealed, there could
be new tax regulations regarding the transfer of assets at death,
and these might apply to a broader segment of the populace. Thus,
permanent life insurance – i.e., life insurance intended to be in
force for one’s lifetime – is still one of the best estate planning
solutions for the unknowns and uncertainties that come with
generational asset transfers.
Guaranteed Money, Precisely When Needed The essential advantage of life insurance in estate planning is
the guaranteed liquidity it provides for a future event (death),
whenever it happens. In the past, large estates may have
earmarked the proceeds from an insurance benefit to pay taxes,
ensuring that other, more valued assets (such as homes or
businesses) did not have to be sold to satisfy the bill. But apart
from federal estate taxes, a permanent life insurance program can
be used in a variety of ways to optimize the transfer of valuable
assets to future generations. For example, permanent life
insurance can…
Protect and preserve the most valuable assets. A family
home with a mortgage becomes an obligation of the estate at
the death of the owner. Similarly, outstanding business and
personal loans must be settled. From a balance sheet
perspective, an estate may have enough assets to meet these
monthly obligations or make a payoff. But liquidation of these
other assets may occur at inopportune times, or require the
estate to accept discounted valuations. Life insurance is an
economically efficient strategy to provide instant liquidity
precisely when needed, and allow valuable assets to remain in
the estate or be liquidated for full value.
Provide equitable treatment for heirs with disparate
interests. Because of circumstances, some heirs may not value
estate assets, like real property or ownership of a business, in
the same way. An heir may prefer to sell his percentage of
ownership rather than continue as a partner with other
beneficiaries. In these situations, the disinterested heir can
force a sale or compel other beneficiaries to borrow against
estate assets to receive his share. The immediate liquidity from
a life insurance benefit can eliminate these costly options,
while providing equitable treatment for those who want out.
Serve as an escrow account for other estate-related taxes. The elimination of the federal estate tax does not affect the
levies states may charge. As of 2016, fifteen states have estate
taxes and six impose inheritance taxes, with the top brackets
taking a 20 percent cut of assets over specific thresholds.
In addition, the repeal of the federal estate tax may give rise to
higher capital gains taxes. One of the unique features in current
estate tax law is the “step-up” in basis that heirs receive when
inheriting financial assets. This means a beneficiary’s basis for tax
The essential advantage of life insurance in estate
planning is the guaranteed liquidity it provides for a
future event (death), whenever it happens.
COULD YOUR FINANCIAL PLANS ADJUST TO
AN END OF WORK?
Life Insurance:
Life Insurance:
© Copyright 2017 2017-33568 Exp. 1/2019 P a g e | 4
purposes is the value on the date of transfer, not the original
purchase price.
Some proposals concurrent with the elimination of the estate
tax eliminate this step-up, meaning that a beneficiary could incur
significant capital gains taxes when liquidating an asset from the
estate. A 15 or 20 percent tax on capital gains calculated on the
original share price could be just as substantial as an estate tax
assessment.
To add to the complexity, tax laws change frequently. Life
insurance is a “pop-up” escrow account for these taxes, whatever
they may be.
When a financial professional says “Let’s look at ways to
increase the return on your savings,” what comes to mind?
A. Considering financial instruments with longer holding
periods?
B. Increasing your investment risk?
C. Committing to a more active allocation strategy?
Or…
D. Getting a financial efficiency review?
The setup gives it away. You should choose D every time.
Improving your financial efficiency to “find” more dollars to save
is almost always the best way to increase your returns (at least
until you’ve built a sizable accumulation).
While you may conceptually assent to the superior results
from a financial efficiency review, a mathematical analysis really
hammers home the value. You just have to see the numbers.
The Math (Oh My!) Scenario 1: Suppose you are currently saving $1,500 each
month. Suppose also that your annual return on your savings is
4%, compounded monthly. (Standard disclaimer: This is a
hypothetical situation, and the illustration does not assume the use
of a specific financial instrument. It’s just a numerical
comparison; real-life results would likely vary.) This is a month-
by-month progression of deposits and earnings.
Scenario 2: You make an adjustment to your allocation
strategies that results in a 6% annual return; the earnings
obviously increase. A 50% increase in return (from 4 to 6%)
seems significant, but actual numbers are less impressive.
Over a year, the difference in return is slightly more than $200.
That’s about $17 a month (also known as the price of an extra-
large pizza with three toppings).
Scenario 3: What results might come from a review that
cleans up some of your financial inefficiencies and “finds”
additional savings? Could it be $50 a month, or maybe $100?
Using the original 4% rate of return, let’s add $100 each month.
Obviously, bigger deposits will produce a higher ending balance.
Scenario 4: The difference between Scenario 1 and 3 is due
almost entirely to adding $100 each month. But to illustrate the
significance of bigger deposits, let’s conclude with this
calculation: What is the rate of return needed on $1,500/mo.
deposits to equal the ending balance of $1,600/mo. earning 4%?
Look at the return variable at the top of the table in Scenario 4.
This is the mind-blower: Scenario 2 would have to earn 15.84%
to equal the results of Scenario 3!
Between pursuing higher returns (Scenario 2) and increasing
financial efficiency (Scenario 3), here are two relevant questions:
1. Which strategy is easier to execute?
2. Which strategy entails the least financial risk?
It is theoretically possible for either strategy to be the best
answer to both questions. But for most households, the default
If you want to ensure
that valuable assets are transferred
intact to surviving generations,
the use of permanent life insurance
should be part of the planning process.
And because your insurability diminishes over time,
some of your earliest conversations about life
insurance should include strategies to keep it for
the rest of your life.
The Best
Return-Boosting Strategy
The Best
Return-Boosting Strategy
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choice should be to look first at becoming more financially
efficient.
Can You Achieve Similar Results? Financial efficiency in personal finance seeks to eliminate or
minimize costly or overlapping expenses, and put more money
under your control. Possible actions to accomplish this objective
might include:
Transferring credit card balances
Consolidating loans
Restructuring personal debt
Re-financing a mortgage
Adjusting deductibles on property and casualty insurance
Evaluating allocations and employer matches in
retirement plans
Re-directing dividends or interest payments instead of
compounding
Not all efficiency options may fit your situation, but it often
takes only one or two to add up. In the example above, an extra
$100 added to existing savings of $1,500 each month is an
increase of less than 7%, which isn’t much. So it’s reasonable to
think an assessment of your financial efficiency might yield
similar results. And as the numbers show, increasing returns
(usually through increased investment risk) to match finding an
additional 7% to save, is usually a tougher challenge.
Granted, the returns from efficiency diminish as your
accumulations get bigger. If you have $100,000 earning 4%, an
increase to 6% is a $2,000 boost in earnings. Accomplishing the
same increase with financial efficiency requires finding almost
$200 each month, which might be a little harder (especially if
you’ve already done a few financial “house-cleanings”).
If you’re someone living across the northern tier of the
continental US, February can be miserable. Read these comments
from Keith Ecker, a blogger who lives in Chicago:
T.S. Eliot got it wrong. February is the cruelest month. It
is cold. It is gray. It is four months into Chicago’s winter with
no jubilant holidays like Christmas or New Years to look
forward to. It’s just a month of depression and death and
bone-chilling awfulness, icy tears and frosty beards made
frostier by my icy tears.
Even if you’re living in a warmer clime, February can be a
grind. For many of us, it would be the perfect time for a vacation.
So why not start planning one? No kidding…
You know what? This might an ideal “starter project” for you
and a financial professional.
The Perils of Long-Term Planning Planning for any future event can be daunting, but especially
when it’s in an area where you don’t have much knowledge or
experience. If you know almost nothing about physical training,
are 20 pounds overweight, and don’t run any further than the
distance from your couch to your kitchen to keep a pot of nacho
cheese from burning on the stove, is it a good idea to a start a
fitness plan by completing an entry form for a triathlon scheduled
five years from now?
Maybe. For some, the magnitude of the goal, and their current
lack of fitness, could be a sufficient motivator. But it might, just
as likely, lead to discouragement and defeat if the goal is too big,
too distant, and without enough psychological reinforcement to
maintain training.
Sometimes it’s better to progress through a series of smaller
projects. Each little achievement builds experience and
confidence, and lays the foundation for more ambitious efforts.
A Fun Financial Idea? There’s a parallel in the experience many households,
particularly young ones, have with personal financial planning
services. When they first meet with a financial professional, one
of the first topics for discussion is usually retirement. Which, if
you think about it, is sort of a triathlon-level personal finance
project.
Here’s the all-too familiar scenario: You’re in your thirties,
just getting established in your career, finally making a little more
than your expenses, perhaps with a young family, but still dealing
with student loans, weighing whether to make a 30-year
commitment for a home of your own, and someone says, “You
ought to meet with ___________; he/she is helping me plan for
retirement.”
Retirement? You mean that thing that happens when you’re
about 70? The thing you have to save so much money for because
inflation will make everything so much more expensive 40 years
from now? Do you know how discouraging it is to reach this point
of finally getting your head above water, only to be told you need
to start swimming upstream in order to have any chance of
reaching the dry ground where you can finally enjoy life?
Whole bunch of metaphors there. But seriously:
Let’s Start
with a Vacation!
Having said this, finding ways to increase deposits remains a proven method for maximizing long-term accumulations while minimizing risk. And done right, a financial efficiency review should be painless; the extra money that is saved doesn’t diminish your lifestyle. It’s money redeemed from waste.
If you could go anywhere
for one week in February --
Where would it be?
What would you do?
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What if your first “project” with a financial professional was
a little less daunting? Wouldn’t it be fun (who uses that word
when discussing personal finance?) to earn some sort of short-
term reward for successful completion?
And whether the objective is an ideal retirement or a dream
vacation, successfully accomplishing your goals is going to look
pretty much the same, and require many of the same actions.
You’re going to want to know you have enough money to spend
freely, instead of doing without, skimping on the experience, or
borrowing to make it happen. That will mean putting together a
savings plan and finding the money, either by committing to
delayed gratification or by eliminating the inefficiency and waste
in your transactions.
The difference with planning for a vacation is the payoff could
occur in one, two or three years instead of thirty. Not to diminish
the necessity of saving for a long time to produce a comfortable
retirement, but there’s significant psychological value in
experiencing regular pre-retirement financial rewards from your
management plans.
Planning for a dream vacation might seem disconnected from
“long-term” and “important” financial objectives, but maybe not.
Suppose the dream vacation is a 10-day river cruise in
Europe. Estimated price for two, including airfare: easily $7,000,
probably closer to $10,000.
If you’ve saved that much money in the past two years, you
probably have a true appreciation for what it took to accumulate
it. It might even prompt you to consider what it would feel like if
things changed – like your job, or your health – and you couldn’t
continue to save – for vacations or retirement. Having begun to
master your personal finances, you might place a higher value on
those instruments of income protection, like disability and life
insurance, to ensure you can keep on saving to provide great
experiences in the future, including retirement.
There’s significant psychological value in experiencing regular pre-retirement
financial rewards from your management plans.
Yes, this commentary is a little
tongue-in-cheek.
A vacation in Europe
may not make you
fall in love with life and
disability insurance. But the
psychological incentives
behind setting and
achieving short-term
goals are valid. So…
Let’s start with a vacation!
This newsletter is prepared by an independent third party for distribution by your Representative(s). Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice. Links to other sites are for
your convenience in locating related information and services. The Representative(s) does not maintain these other sites and has no control over the organizations that maintain the sites or the information, products or services these organizations provide. The Representative(s) expressly disclaims any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. The Representative(s) does not
recommend or endorse these organizations or their products or services in any way. We have not reviewed or approved the above referenced publications nor recommend or endorse them in any way.
Lifetime Financial Growth
244 Boulevard of the Allies
Pittsburgh, PA 15222
(412) 391-6700
Lfgco.com
This firm is an agency of The Guardian Life Insurance Company of America (Guardian), New York, NY. Securities products and advisory services offered through
Park Avenue Securities LLC (PAS), member FINRA, SIPC. Lifetime Financial Growth is not a registered investment advisor.
